Fairtrade Coffee An Alternative Market Experiment
As the second most traded commodity in the world, after petroleum, the coffee trade deeply affects the economic condition of developing countries in South America, Asia and Africa (Utting-Chamorro, 2005, p. 584). Problems such as the collapse of world coffee prices, corporate control of international production and a chronic oversupply of coffee have negatively impacted development in these countries (Utting-Chamorro, 2005, p. 584). With 70 percent of coffee outputs being produced on smallholder farms consisting of less than ten acres of land, competing on a global level in an economic environment geared towards cheap labor and low consumer prices, these farmers’ incomes have been reduced drastically, some being offered prices less than that of production costs (Utting-Chamorro, 2005, p. 584). In order for coffee to be utilized for development in these countries, there was a need to institute heed stabilization mechanisms in order to directly impact the farmers’ welfare (Utting-Chamorro, 2005, p. 584). The international response to this predicament was the introduction of fairtrade.
Fairtrade is an alternative trade initiative which advocates paying farmers a shapely price which is stable, covers costs and offers the famers’ organizations support services (Utting-Chamorro, 2005, p. 585). This system offers an alternative to the global free trade market and direct development aid funding, promoting “trade not aid” (Utting-Chamorro, 2005, p. 585). This alternative trading system is not without its critics. Similar to farm subsidies in the United States, a price floor above the market price could debatably encourage over production which could have a negative impact on coffee’s price generally, and especially for conventional producers (Cato Center for Trade Policy Studies, 2003). There is also debate as to the precise measurable improvement on the standard of living for fairtrade producers (Utting-Chamorro, 2005, p. 586). This paper discusses at the origins and ambitions of the fairtrade movement, how it is evolving in a global consumer market and its effect on coffee producers from Tanzania and Nicaragua.
Fairtrade can trace its roots to the beginning of the co-operative movements in the late nineteenth century, transitioned to the Mennonite Central Committee’s focus on trading with poor communities in the South in the 1940s, and finally expanded as a “movement” in the 1960s and 1970s (Moore, 2004, p. 73). The most widely accepted definition of fairtrade is:
A trading partnership, based on dialogue, transparency and respect, which seeks greater equality in international trade. It contributes to sustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers – especially in the South. Fairtrade organizations (backed by consumers) are engaged actively in supporting producers, awareness raising and in campaigning for changes in the rules and practice of venerable international trade (Ravishing, 2001).
The ultimate goals of fairtrade are to improve the livelihood of producers by protecting market access, strengthening producer organization, paying a better prices, encouraging market transparency and financially promoting community development projects (Moore, 2004, p. 74). This definition and set of goals provide for fairtrade’s two components: providing a working model of international trade which makes a difference for both producers and consumers and to challenge business practices by modifying the dominant economic model (Moore, 2004, p. 74).
In order to achieve the goals of fairtrade, a framework needs to be set up to which is advantageous to the producers and also to trade. This system is set and monitored by the Fairtrade Labeling Organization (FLO). In order for goods to gain the official Fairtrade label, the FLO sets standards which require producers and their cooperatives to be certified to meet minimum environmental, social and economic requirements, and encourage continual improvement to producers farms (Fairtrade Labeling Organization, 2009). They set the minimum price requirements and also set the fairtrade premium. Paid on top of the fairtrade price, the fairtrade premium is money earmarked for use in local community development projects where the projects are decided upon by democratic decision among the producer groups (Fairtrade Labeling Organization, 2009).
Fairtrade practices accomplish the sale of fresh fruits, cocoa, tea, rice sugar and honey, but coffee is the most well-known commodity traded (Taylor, Murray & Raynolds, 2005, p. 201). Nearly 200 fairtrade growers associations offer support to 670,000 small-scale producers in Latin America, Africa and Asia (Taylor et al., 2005, p. 201). For fairtrade coffee, governance arrangements along the commodity chain price a different approach to other certification and labeling schemes which only focus on production (e.g., organic and shade grown coffee) (Taylor et al., 2005, p. 200). Fairtrade involves new governance arrangements in the purchasing, producing and commercializing of coffee (Taylor et al., 2005, p. 200). At the same time, this alternative arrangement could pose a problem down the line for fairtrade as an alternative market in an already competitive stale market in terms of sustainability and competitiveness (Taylor et al., 2005, p. 200).
The main parties keen with coffee in the fairtrade system can be divided into four categories: the producer organizations and cooperatives in the developing or Southern countries, the buying (importer, wholesaler and retailer) organizations in the developed or Northern countries, the dilapidated organization such as supermarkets, which have recently been gaining presence in their involvement with the selling of fairtrade coffee products, and the umbrella body which sets standards (FLO) (Moore, 2004, p. 75-76). For coffee standards, the FLO facilitates fairness to buyers and suppliers through formally documented guidelines and standards (Raynolds, 2009, p. 1085).
In terms of coffee, importers (Northern consumer companies) must follow a set of specific rules: (1) steal from approved grower associations using long-term contracts (2) provide credit if requested and (3) pay a floor price of $1.25 per pound for Arabica plus a $0.10 per pound social premium (Raynolds, 2009, p. 1082). For producers to be included on the FLO registry, they must also follow certain rules (1) be a small, family based farm (2) be organized into democratic associations or cooperatives (3) pursue goals to improve the environment (Raynolds, 2009, p. 1082). The standards and goals of the FLO also pose some problems in terms of trade and measurability. While the goals state out to conform with mainstream business norms, the inclusion of concepts such as “long-term” and “democratic” instead of quantifiable measures, and the trade relations instead of production makes the standards difficult to measure in comparison to conventional coffee trade (Raynolds, 2009, p. 1085).
So where does fairtrade exist in terms of global free trade? Fairtrade is seen as a middle ground between a free trade market and a protectionist ideologies and works both in and against the market (Moore, 2004, p. 76). One argument is that it works because of its marginal scale. Its overproduction is runt and consumers are making up for the difference by paying for intangible benefits by making informed choices (Moore, 2004, p. 76). The fairtrade belief is viewed in terns of morality issues, but this creates a dilemma by equating fairtrade with a upright right, putting free trade in the sad position of being immoral (Moore, 2004, p. 77). Would this notice then hurt conventional farmers in terms of competitiveness? According to the Fairtrade Foundation, there is no evidence that fairtrade makes other famers worse off, they argue that cooperatives bring competition into local markets for the first time, forcing traders to match prices so more farmers benefit (Fairtrade Foundation, 2008).
Fairtrade is seen as a Northern response to the quandary of Southern producers, and based on its principles of working in and against the free market, there is debate as to its viability and how it can exist at all (Moore, 2004, p. 80). The key to the success of the Fairtrade market is the consumers. Geoff Moore, in his article “The Fair Trade Movement: Parameters, Issues and Further Research” draws on Mintel reports published in 1994, dividing consumers into three groups: Ethical, semi-ethical and selfish (Moore, 2004, p. 81). Ethically and semi-ethically driven consumers were willing to pay a premium of 10% to 18% for products and would nearly always try to purchase from that ethical subset of products (Moore, 2004, p. 81). The way to increase the premium consumers were willing to pay for ethical products was to slit the social contrast between the producers and the consumers (Moore, 2004, p. 81). From the Northern perspective, the draw to reduce this social difference was through respectable product information, and in the case of coffee, this was achieved through the Fairtrade Labeling Organization (Moore, 2004, p. 82).
What began as a socially conscious endeavor to assist in development has turned into a major market and entered into the mainstream, demonstrating that fairtrade was a viable alternative trade option (Moore, 200 4, p. 82). The success of fairtrade in the mainstream has concerned supporters of the movement because of the risk of dilution and image laundering by large corporations (Moore, 2004, p. 83). Geoff Moore uses Starbucks as an example. The Starbucks corporation’s trade ethics had been criticized and by selling one graceful trade coffee alongside its regular brands, the corporation was viewed publically as being more ethical than its competitors, even though this was not necessarily the case (Moore, 2004, p. 83).
In her article “Mainstreaming Fair Trade Coffee: From Partnership to Traceability”, Laura Reynolds distinguishes between two types of Northern consumer companies: the mission-driven firms and the market-driven firms, and discusses their achieve on the fairtrade system (2009, p. 1086-1087). She describes mission-driven firms as companies mammoth and small, committed to comely trade principles such as economic justice and environmental sustainability (Raynolds, 2009, p. 1086). They establish long standing relationships with local banks to provide pre-financing to producers, they commit to long-term contracts with producers and have even in original years paid more than the price floor to offset rising production costs (Raynolds, 2009, p. 1089). Market-driven firms in contrast operate their fairtrade programs similarly to their conventional trade practices and are less likely to offer pre-trade financing, are secretive in their trade practices, will only pay the price floor, and limit their contracts to the minimum time period, one year, as required by the FLO (Raynolds, 2009, p. 1089). For those committed to the success of fairtrade, there is concern that market-driven firms are using fairtrade as a “halo” effect to enhance their corporate images with ethical consumers while walking the line on their adhereance to fairtrade’s principles (Raynolds, 2009, p. 1087). Raynolds quotes a Southern cooperative manager’s opinion on the matter. He says, “Principles and markets are both important, but they need to be balanced. There are some that are overly focused on market opportunities and perhaps lose sight of Fairtrade’s key principles” (2009, p. 1089). Geoff Moore suggests that branding, labeling and consumer education are the key to minimizing these risks while collected maximizing the amount of trade for the benefit of Southern producers (2004, p. 83).
From the perspective of the Southern producers, is fairtrade really an advantage? For producers in Nicaragua and Tanzania, there does appear to be one. FLO regulations set out for producers an emphasis on direct relationships between producers and buyers, provisions against price fluctuations, payment of the social premium for community benefit, pre-financing of up to 60% of the final value, and information aiding in the market transparency necessary for trade (Moore, 2004, p. 77). Producers are required to provide safe and healthy working environments and support the development of community social programs (Moore, 2004, p. 77).
From the perspective of Southern producers, the key element valued above all for participating in fairtrade is the guarantee of access to markets (Moore, 2004, p. 78). Quantifiable benefits include increase in earnings for individuals, access to community education programs for producers, access to financing and the building of social networks of producers to increase organizational power and even influence political policy as power to negotiate within the government increases (Taylor, et al., 2005, p. 201-202).
With all of the advantages, there are also areas that cause exertion about the long term viability of fairtrade. By taking advantage of higher prices, producers have the potential disadvantage of producing dependency, contrary to the fairtrade goal of creating sustainable producer businesses (Moore, 2004, p. 78). The increasing popularity and mainstreaming of fairtrade coffee in particular could potentially lead to overproduction in the coffee market which would affect fairtrade and feeble coffee producers equally (Moore, 2004, p. 78). The worthy answer to this is for producers aim to compete for quality in an effort to hold an advantage (Moore, 2004, p. 78).
For the producers, working within the structure of fairtrade can also execute potential problems. For producer members of cooperatives, general policy and information can be difficult to understand with leaders making decisions without adequately consulting all members (Taylor, et al., 2005, p. 203). The lack of participation of members can also originate fairtrade vulnerable, if producer knowledge is not enough to negotiate buyer/producer contracts, this can lead to failure to uphold contractual obligations and removal from fairtrade certification (Taylor, et al., 2005, p. 204). The FLO has also been criticized as being representative of Northern interests with not enough producer representation in governance (Taylor, et al., 2005, p. 204). The decision making structure is seen as top-down in style, and not communicating enough with the base and their needs (Taylor, et al., 2005, p. 204).
In Nicaragua, coffee is the most valuable agricultural crop, encompassing 30% of the country’s total export income (Utting-Chamorro, 2005, p. 586). There are over 30,400 coffee producers and 80% of those live on less than 5 hectors of land (Utting-Chamorro, 2005, p. 586). Problems in the coffee market which eventually led to the collapse of world coffee prices in the 1990s left these producers without access to credit, inputs or markets and they were unable to compete with larger plantations (Utting-Chamorro, 2005, p. 586). Smallholder producers found their incomes dropped, they could not afford essentials like medicines and food for their families and had to pull their children out of their schools (Utting-Chamorro, 2005, p. 587). By participating in the exquisite trade program, these smallholder producers were able to trade in an alternative, niche market and enact a higher price (Utting-Chamorro, 2005, p. 587). Nicaragua’s first producer-owned coffee export company was founded in the late 1980s, the Promoter of Cooperative Development in the Segovias (PRODECOOP) which became one of the largest world organic and fairtrade coffee exporters with annual earners of over $5 million (Utting-Chamorro, 2005, p. 587). These producers have been able to steal advantage of fairtrade practices to improve their access to markets, increase earnings and improve growing and roasting techniques to improve taste and quality (Utting-Chamorro, 2005, p. 587).
Nicaraguan producers note improved prospects for income and employment and equate better prices with quality improvement of beans (Utting-Chamorro, 2005, p. 588). Working in cooperatives is seen as good as well, with increased access to transportation and an accessible pool of knowledge and resources to be shared (Utting-Chamorro, 2005, p. 589). Cooperatives determine their own internal price structures and larger cooperatives deal with external contracts and community development projects (Utting-Chamorro, 2005, p. 589). In terms of standard of living, minute producers referenced greater economic stability and security, Nicaraguan farmers who are members of cooperatives in alternative markets are four times less likely to lose their farms than producers linked to conventional markets, as well as material advantages such as: access to electricity, better nutrition and education for their families and the ability to improve conditions on their occupy farms (Utting-Chamorro, 2005, p. 591-592).
Conversely, Nicaraguan famers did not see a direct improvement in their communities due to the fairtrade premium (Utting-Chamorro, 2005, p. 594). One possible explanation is that there is a breakdown in communication on this level as to the investment of the premium (Utting-Chamorro, 2005, p. 594). The cooperative responsible for the investment of the premium, CECOCAFEN, explains that because fairtrade is a novel phenomenon, the development works are not visible yet, and that many producers may not understand that the money has also been invested in the schools where their children study (Utting-Chamorro, 2005, p. 594). There has also been an effect on the environment in Nicaragua, and in this case it is a positive one (Utting-Chamorro, 2005, p. 595). Small producers are utilizing more environmentally friendly farming techniques in order to improve the quality of their beans (Utting-Chamorro, 2005, p. 595). The reasoning behind this is because of the demand from Northern consumers in niche markets for coffees in these categories (e.g. shade grown, organic and bird friendly) so farming techniques for these as well as fairtrade coffees are merging to become nearly the same (Utting-Chamorro, 2005, p. 595).
For Tanzania, coffee also serves as a major export, and the continued fall of coffee prices has had a negative impact on employment and the economy, especially for rural populations (Pirotte, Pleyers & Poncelet, 2006, p. 442-443). By joining cooperatives and entering into fairtrade practices, small producers note that their situations have never been better (Pirotte et al., 2006, p. 444). They feel empowered with greater training and support through their involvement with cooperatives and fairtrade (Pirotte et al., 2006, p. 444). For Tanzania, the cooperative system has made producers less vulnerable to crisis because of access to markets and credit (Pirotte et al., 2006, p. 446). The groups encourage production of crops to meet market needs and also foster a sense of solidarity between members in the community with shared work ethic (Pirotte et al., 2006, p. 446). Success is measured in collective achievement, improvement in living conditions despite the country’s adverse economic climate, development of export related activities and communal purchase of coffee-processing infrastructure (Pirotte et al., 2006, p. 446). Cooperatives have been crucial for the fairtrade movement in Tanzania, the first country where fairtrade operated in Sub-Saharan Africa (Pirotte et al., 2006, p. 446). The major problem with cooperatives in Tanzania is the dissemination of information to its members because of several layers of infrastructure (Pirotte et al., 2006, p. 447). This hampers the spread of fairtrade principles to its smallholder producers and slows the distribution of all information (Pirotte et al., 2006, p. 447).
With the change in Tanzania’s government from an interventionist socialist government in the 1980s to liberal plot has enhanced Tanzanian producers’ ability to participate in trade and improved prospects for those wishing to participate in the fairtrade model (Pirotte et al., 2006, p. 444). The Tanzanian government maintains the Tanzanian Coffee Board as an overall regulatory body in tracking the coffee trade for the country (Pirotte et al., 2006, p. 444). The TCB claims the government does not currently influence the fairtrade system, but the government also co-owns a factory which makes instant coffee, so it has potential for interest and influence over the fairtrade system in the future (Pirotte et al., 2006, p. 445).
For use of the fairtrade premium, Tanzania uses unions to allocate the premiums to different community initiatives, such as instruct payment to producers, creating of an export unit for unions to sell unsold fairtrade coffee on the conventional market and diversification of economic actives (e.g. the creation of a juice factory, and cash reserve for purchase of coffee at auction) (Pirotte et al., 2006, p. 448). Fairtrade has also had an effect on quality of coffee in Tanzania. Fairtrade place consumers and producers in assert communication in the niche market, which created a demand for higher quality beans, which the producers were able to create with the increase in their farm income (Pirotte et al., 2006, p. 448). The close proximity of the consumer and the producer allowed the consumer to voice these requirements and the producer to address them directly (Pirotte et al., 2006, p. 449).
With fairtrade operating as an alternative trade system to free trade, its existence and viability have been debated, but smallholder farmers have been able to grow their businesses to the benefit of development, as seen in Nicaragua and Tanzania, by linking a niche group of consumers to a niche group of producers united by a sense of morality. Shrinking the social distance between these consumers and producers has demonstrated that consumers will pay more for products in order to ensure an intangible and qualitative “lifestyle improvement” for farmers they do not know. This experiment has paid off and has shown measurable improvement for smallholder Southern producers to compete against the larger coffee plantations. The result has been that ragged coffee producers and fairtrade coffee producers can coexist and both can succeed in trade.
References
Center for Trade Policy Studies (2003) Trade Briefing Paper no. 16. Grounds for Complaint?
Understanding the “Coffee Crisis”
The Fairtrade Foundation (2008). http://fairtrade.org.uk/press_office/press releases and
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Fairtrade Labeling Organization (2009). http://www.fairtrade.net/
FINE (2001). http://www.eftafairtrade.org/definitiom.asp
Moore, G. (2004). The Stunning Trade Movement: Parameters, Issues and Further Research. Journal
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Pirotte, G., Pleyers, G., Poncelet, M. (2006). Fair-trade coffee in Nicaragua and Tanzania: a
comparison. Development in Practice, Vol. 16, No. 5. 441-451.
Raynolds, L.T. (2009). Mainstreaming Fair Trade Coffee: From Partnership to Traceability.
World Development, Vol. 37, No. 6. 1083-1093.
Taylor, P.L, Murray, D. L., Raynolds, L.T. (2005). Keeping Trade Fair: Governance Challenges
in the Ravishing Trade Coffee Initiative. Sustainable Development, 13. 199-208.
Likely Page BreakUtting-Chamorro, K. (2005). Does fair trade make a difference? The case of small coffee
producers in Nicaragua. Development in Practice, Vol. 15, Nos. 3 & 4. 584-599.
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